Introduction
In 1924, Reynolds Metals purchased Eskimo Pie Corporation from Nelson. Reynolds Metals enlisted Goldman Sachs to facilitate the sale of Eskimo Pie and received six bids. The highest bidder, Nestle Foods, offered $61 Million. However, instead of accepting Nestle Foods’ acquisition offer, Reynolds Metals decided to explore Wheat First’s IPO option due to their longstanding relationship and the complications and conditions that Nestle wanted to impose on the purchase agreement. This report will assess the value of Eskimo Pie Corporation as an independent entity, investigate Nestle’s motives for acquiring Eskimo Pie Corporation, and analyze potential synergies. Finally, we will provide recommendations on whether Reynolds Metals should sell to Nestle or propose an initial public offering based on maximizing the company’s financial requirements while considering foreseeable risks.
The value of Eskimo Pie Corporation as an independent entity can be determined by considering its own assets and projected future cash flow. The present value is calculated through fundamental valuation, which involves discounting the future value based on certain assumptions. These assumptions include a project duration of 30 years, capital expenditure not exceeding $1 million, depreciation of $1.18 million per year (averaged from 1989 and 1990), and a discount rate of 10% that includes market risk premium and inflation rate. Based on these assumptions, the estimated stand-alone value for Eskimo Pie at the end of fiscal year 1991 is $51 million. Taking into account the $13 million cash reserve accumulated by Eskimo Pie, the overall value for the corporation would be $64 million.
However, it is important to note that this method has limitations as it relies on assumptions that may introduce inaccuracies in valuation. To achieve greater accuracy in determining Eskimo Pie’s value, a Comparable Company Analysis approach can be used by examining the entire Frozen Novelty Industry. This involves comparing Eskimo Pie’s valuation to publicly traded companies such as H.J. Heinz Corporation and Unilever Corporation.
According to Goldman Sachs’ predictions, Eskimo Pie’s net sales are expected to reach approximately $57 million, which is 1.2 times higher than its sales in 1990.
According to this evaluation, it indicates that Eskimo Pie might be slightly underestimated. The following are the sales numbers from 1987 to 1990, presented in both dollars and a visual format. The exact amounts for each year are as follows: $31,769,000 in 1987, $36,695,000 in 1988, $46,709,000 in 1989, and $47,198 in 1990. Please refer to the chart provided below for a clear representation of this information.
Eskimo Pie has experienced rapid growth. From 1987 to 1990, the average growth rate was at 16%. Based on this rate, the net sales of Eskimo Pie would be 1.16 times the 1990 sales, or about 54.6 million. In addition, Eskimo Pie products were available in 98% of all U.S. Grocery Stores, which led to high consumer brand name recognition. This has significant implications in evaluating Eskimo Pie’s value. Personally, I believe this adds an extra 1% to the value estimate, bringing the estimated sales to 1.26 times the 1990 sales, or about $59.4 million. When considering the market share of the top Frozen Novelty Brands in 1991, Eskimo Pie was among the top three. The market share for the top brands, Popsicle, Klondike, Eskimo Pie, Snickers, and Weight Watchers, were 7.6%, 5.4%, 5.3%, 4.8%, and 4.3%, respectively (See the following chart).
Undoubtedly, possessing a commendable market reputation and a significant market share elevates the value of Eskimo Pie’s company. Adding an additional 4% appears to be justifiable. Consequently, Eskimo’s worth amounts to 1.30 times its sales in 1990, approximately equating to $61.4 million.
